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January 9, 2023

FTC might ban noncompetes. What could this mean for healthcare?

Daily Briefing

    The Federal Trade Commission (FTC) proposed a rule that will prohibit companies from including noncompete clauses in employment agreements—a move many experts believe "will make the healthcare labor market more fluid and competitive."

    Your employee just quit. What do you do now?

    FTC proposes a ban on noncompete clauses for workers

    On Thursday, FTC proposed a rule to prohibit companies from including noncompete clauses in employment agreements. According to FTC, noncompete contracts, which usually prevent employees from seeking employment with a competitor for a certain period after they leave a company, impact roughly one in five American workers.

    According to FTC officials, noncompete clauses have a negative impact on both workers and companies.

    "Noncompetes are basically locking up workers, which means they are not able to match with the best jobs," said FTC Chair Lina Khan. "This is bad for competition. It is bad for business dynamism. It is bad for innovation." 

    Last month, a four-member FTC commission voted 3-1 to issue the proposal, which must undergo a 60-day period of public comment before it can be adopted.

    If FTC's proposed rule is adopted, companies will not be allowed to impose noncompete contracts on new employees or maintain existing contracts. In addition, the rule stipulates that companies with active noncompete clauses must inform workers that the contracts are void. 

    FTC estimated that banning noncompete clauses would boost annual employee earnings by up to $296 billion. According to the agency, part of the increase represents an income transfer from firms to workers and consumers to workers, which would occur if firms were compelled to raise prices in response to wage increases aimed at retaining workers.

    Ultimately, "[t]he freedom to change jobs is core to economic liberty and to a competitive, thriving economy," Khan said.

    "Noncompetes block workers from freely switching jobs, depriving them of higher wages and better working conditions, and depriving businesses of a talent pool that they need to build and expand," she said. "By ending this practice, the FTC's proposed rule would promote greater dynamism, innovation, and healthy competition."

    What this means for healthcare

    Across the healthcare industry, the proposed ban would likely have a significant impact. Research suggests that at least 40% of physicians are employed under restrictive covenants that often prohibit them from working for competitors within a 30-mile radius for a period of one to two years, Modern Healthcare reports.

    These contracts are often more common and more strictly enforced in the insurance and pharmacy benefit manager industries.

    In particular, most insurance executives are employed under noncompete clauses, said Tom Giella, chair of the management consultancy and executive search firm Korn Ferry's healthcare services practices. According to Giella, when a former employee breaches a noncompete agreement by accepting a position with a competitor, the previous employer may sue or deny deferred compensation or vested equity.

    "Noncompetes are tough to break in the insurance industry, and they will go after you," Giella said. "Banning noncompetes will make the healthcare labor market more fluid and competitive, and salaries would probably go up."

    A 2022 survey of 117 orthopedic surgeons in Louisiana found that anti-competitive contract provisions, including noncompete clauses, may reduce quality. In the survey, almost two-thirds of respondents said noncompete agreements force patients to travel long distances to maintain high quality care over time. In addition, over three-quarters of the doctors said they were forced to abandon patients because of noncompete clauses.

    Still, advocates of noncompete clauses argue that the contracts can push employers to invest in technology or increase workers' pay. According to David Woolf, a partner at the law firm Faegre Drinker Biddle & Reath, companies may pay workers a higher salary if their work is protected from competitors for specific period.

    "Noncompete clauses could give employers incentive to innovate and invest when they know what they are working on is protected and the employee isn't going to walk out the door and go to a competitor," Woolf said. "That is the concern I have."

    Beth Vessel, an antitrust attorney at the law firm Waller Lansden Dortch & Davis, noted that the ban could affect the value of healthcare mergers and acquisitions. According to Vessel, acquirers may pay less if they do not have a guarantee that employees will remain for a certain period after a deal is finalized.

    In addition, provider associations will likely sue FTC if the policy is adopted, Vessel noted. "I don't know if it will ultimately survive because it is so broad," she said. "It seems like a pretty steep uphill battle in the courts." (Gurley, Washington Post, 1/5; Michaels, Wall Street Journal, 1/5; Sisco/Niedzwiadek, Politico, 1/5; Kacik, Modern Healthcare, 1/5; Davis, HealthLeaders, 1/5)

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